Volarexinc. acquires a new machine it is comprised of 2 different components ( A and B) that are expected to be overhauled at different intervals.
The acquisition costs of the machine are as follows:
Component A $198,000
Component B 240,000
Total $ 438,000
Component A is expected to have a useful life of 5 year and a residual value of $20,000 before the first major overhaul is required. Component B is expected to have a useful life of 7 year and a residual value of $15,000 before its first overhaul. Volarex uses IFRS accounting principle.
Instrucation
1) Assuming straight line depreciation what will be the net book value of component A after 5 year?
2) At the beginning of year 6 component A undergoes a major overhaul at a cost of $100,000. Prepare the journal entry to record the overhaul.
3) The overhaul in #2 is expected to extend its life by 3 year with a residual value ofzero.volREX USES THE STRAIGHT LINE METHOOD to depreciate this asset. What will be the net book value of component A one year after the overhaul.
4) Assuming the double declining balance used what will be the net book value of component B at the end of year 1? At the start of year 2 it is estimated that the useful life of component B is 4 more year ( 5 year in total) and the residual value is $10,000. Prepare the journal entry to record depreciation for year 2.